Lentuo International Inc. (NYSE: LAS), a Chinese non-state owned automobile retailer whose shares are traded in the U.S., recently became the subject of a research report authored by GeoInvesting, a website that offers insights on micro-cap and mid-cap equities in China and U.S. The report, released on May 28, cast Lentuo into negative publicity, accusing the Chinese automobile retailer of withholding material information from its consolidated financial statement for the year ended December 31, 2013.
According to the allegations leveled in the report, Lentuo Electromechanical, a People's Republic of China owned entity which is controlled by Hetong Guo-the same person who is Lentuo International's founder and Chairman-incurred a RMB250 million debt (around $40.21 million) with two trust funds that Guo's shareholding in Lentuo International, as well as the company's revenue, were used to secure as collateral. In addition to Guo using his shares in Lentuo International as well as the company's revenue to secure a loan for Lentuo Electromechanical, GeoInvesting, the originator of the allegations, claims that Lentuo International did not disclose this information in its consolidated financial statements for fiscal 2013.
Lentuo International, which Emerging Growth previously covered in a separate publication is accelerating its push to corner the Chinese pre-owned car market, refuted the claims made byGeoInvesting, saying that the report contained "misstatements" and "misleading speculations". Lentuo International pointed out that although both it and Lentuo Electromechanical are controlled by Guo, the two are separate entities and loans incurred by either did not necessitate disclosure by the other.While Guo admitted to a RMB150 million loan for Lentuo Electromechanical from one trust fund, he denied that he pledged his equity interest in Lentuo International or the company's revenue as collateral.
Business as Usual
As if in display of its unperturbed stance at the wake of GeoInvesting's allegations, Lentuo International recently announced that it would open a new FAW-VP dealership in Xuzhou, which is in the wealthy province of Jiangsu. The FAQ-VP dealership, which is Lentuo International's fifth such dealership in the wider Chinese market, but its first in Jiangsu, is part of the ongoing drive to expand business beyond Beijing.
Xuzhou is a transportation and manufacturing hub with a prospering economy and will provide a great market for Lentuo International's vehicles. Moreover, the fact that the area is a manufacturing hub suggests that labor is in abundant supply, a factor that may allow Lentuo International to access labor at cheaper costs at a time when overall wage levels in China are increasing. Analysts from Bank of America (NYSE: BAC) expect that by the end of 2014, China's wages will have increased by 11 percent compared with 2013 levels, according to a publication on Bloomberg. By locating its new dealership in a manufacturing hub, Lentuo may be able to get its labor at a discount relative to the broader market, despite the overall upward movement in wages. This should give it an edge, especially in its repair and maintenance service centers, which are crucial to cornering the growing Chinese pre-owned car market.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.